Is the coverage trigger similar to that of a general liability policy?
Most general liability policies are triggered when the claim or incident occurs. This means that the claim or incident is covered by the policy in force when the incident happened.
Most professional liability policies are triggered when the claim is made against the insured. This claims-made basis means that the claim is covered by the policy in force when the insured is notified of the claim, which could be long after the incident occurred.
Typically, professional liability policies require the claim to be reported to the insurance company during the same policy period in which the insured was first notified of the claim. This makes timely reporting of claims imperative.
In addition, the alleged incident must have occurred after any retroactive date declared in the policy. If the insured does not comply with the reporting requirements or the alleged incident occurred prior to the retroactive date, the insured’s policy may not respond.
Do the strict requirements of a claims-made policy create issues when changing insurers?
Yes. When an insured is contemplating moving professional liability coverage to a new insurer, continuity is extremely important.
There are three areas to consider. First, does the new carrier require a retroactive date? If so, does it match the date from the old insurance carrier? Second, is there a pending or prior litigation exclusion date? If so, does it match the pending and prior litigation date from the old carrier? Lastly, what type of application is the new insurer requesting? Will it accept what is known as a ‘renewal’ application, or will it require a ‘main form’ application?
In the main form application, there are warranty provisions that require the insured to acknowledge any circumstance it knows about that could result in a future claim. If the insurance company can show that the insured breached the warranty and was aware of such a circumstance, the insurer could deny coverage at the time of loss.
If the new insurer will not grant continuity, the insured may invoke an extended reporting provision in the expiring policy. This allows the insured to purchase an extended reporting period (ERP), or ‘tail coverage’ to report claims-made during the ERP for circumstances that occurred during the expired policy period. For example, one firm is acquiring another and the insurer for the acquiring firm will only cover acts that occur after the acquisition. The firm being acquired may purchase tail coverage for a one-time premium that will allow the acquired firm to submit claims for circumstances that occurred during the previous policy period to its insurer during the ‘tail’ or ‘run-off’ period, usually three to six years.
How can business leaders determine if their firms have appropriate coverage?
The best way to make certain the professional liability coverage for your firm provides the right protection is to work with an insurance agent or broker who specializes in that type of coverage. Your agent or broker can work with your firm, obtain quotes from different insurers, analyze the programs offered and assist in structuring the professional liability program to best meet your needs.
Paul D. Maxwell is a senior account executive at Aon Risk Services Central, Inc. Reach him at (248) 936-5356 or [email protected].
